5 Ever-So-Simple Strategies for Paying Off Debt in 2017

Here are some tips for paying off debt in 2017.

Want to pay off your debt and save more money in 2017? You’re not alone! According to one survey of Google search data, searches for “Spend Less/Save More” were up 17.47% from 2016. Want to achieve your get-out-of-debt goal? If so, we recommend trying one of the five strategies here.

1. The Debt Snowball

This debt-payoff method, made famous by financial guru Dave Ramsey, has you pay off your smallest debts first. The idea behind the debt snowball is that you get a quick psychological boost from paying off some small debts from the get-go. This gives you the mental momentum to keep going when paying off debt.

To start a debt snowball, list your debts in order from smallest to largest. Use any extra money to pay off the smallest balance while you make minimum payments on your other debts. When your smallest debt is paid off, snowball that debt’s minimum payment, plus your extra cash towards paying off the next debt. By the time you get to the largest debt, you’ll be throwing a lot of money at it each month. (You can see how your debt is affecting your credit by viewing two of your credit scores, with updates every 14 days, on Credit.com.)

2. The Debt Avalanche

This is similar to the debt snowball in that you pay off one debt at a time. But it’s actually the more economical method of paying off debt. Instead of paying off smaller balances first, the debt avalanche has you start by paying off the debts with the largest interest rate.

The debt avalanche is a smart method if you already have the determination to make it through a long debt payoff process without the boost of paying off a few smaller debts early on. It can get you out of debt faster since you’ll stop accumulating interest on high-interest debts much more quickly.

3. The Debt Snowflake

This is a method that can be combined with one of the above options or used to pay off debt in any order you choose. The idea here is that you find small ways to save a few bucks, and then transfer that money saved toward debt payments.

With the debt snowflake method, you’ll need to be exceptionally aware of your spending patterns. For instance, if you normally spend $10 on a lunch out at work, but pack your lunch one day, you could save $5. That $5 is a snowflake that can then go toward paying off debt.

The key to debt snowflakes is to make sure they don’t “melt.” Get into the habit of transferring “snowflake” money to debt accounts immediately, or at least on a weekly basis. Otherwise, you run the risk of that hard-saved cash being used for other purposes.

4. The Credit Card Transfer

If much of your debt is in the form of high-interest credit card balances, consider using balance transfer offers to pay off that debt more quickly. Since credit cards often have interest exceeding 15%, it’s not unusual for most of your minimum payment to go toward interest, even on a relatively small balance. If you can transfer that balance to a card with a 0% introductory annual percentage rate, you can put more money toward the principal balance each month, paying off your debts more quickly.

Be careful, though, to read all the terms of a credit card balance transfer. Most cards charge a fee for the balance transfer. If you’ll pay off the card’s balance quickly, the transfer may actually cost more than it saves. You can find more info on some of the better balance transfer credit cards here.

5. The Half Payment Method

What if you’re on such a tight budget that you can’t even squeak out some extra dollars to start on a debt snowball or avalanche? One option is to start making half of your minimum payment every two weeks. Bi-weekly payments, which may fall when you get a paycheck, can save you money over time on debts that are compounded daily or monthly based on the average balance.

The reasoning behind biweekly payments is somewhat complex. But, essentially, paying more often allows less interest to accrue between payments, which means more of your payment goes toward the principal. Plus, if you make a half payment every two weeks, you’ll actually have made a whole extra minimum payment by the end of the year!

Half payments can help even out your bank account balance and can help bring down your debt balances more quickly. Combining the bi-weekly payment method with another method for applying any extra cash you scrape together toward one debt at a time could be a powerful option for meeting your financial resolution this year.

Image: FatCamera

The post 5 Ever-So-Simple Strategies for Paying Off Debt in 2017 appeared first on Credit.com.

5 Ever-So-Simple Strategies for Paying Off Debt in 2017

Here are some tips for paying off debt in 2017.

Want to pay off your debt and save more money in 2017? You’re not alone! According to one survey of Google search data, searches for “Spend Less/Save More” were up 17.47% from 2016. Want to achieve your get-out-of-debt goal? If so, we recommend trying one of the five strategies here.

1. The Debt Snowball

This debt-payoff method, made famous by financial guru Dave Ramsey, has you pay off your smallest debts first. The idea behind the debt snowball is that you get a quick psychological boost from paying off some small debts from the get-go. This gives you the mental momentum to keep going when paying off debt.

To start a debt snowball, list your debts in order from smallest to largest. Use any extra money to pay off the smallest balance while you make minimum payments on your other debts. When your smallest debt is paid off, snowball that debt’s minimum payment, plus your extra cash towards paying off the next debt. By the time you get to the largest debt, you’ll be throwing a lot of money at it each month. (You can see how your debt is affecting your credit by viewing two of your credit scores, with updates every 14 days, on Credit.com.)

2. The Debt Avalanche

This is similar to the debt snowball in that you pay off one debt at a time. But it’s actually the more economical method of paying off debt. Instead of paying off smaller balances first, the debt avalanche has you start by paying off the debts with the largest interest rate.

The debt avalanche is a smart method if you already have the determination to make it through a long debt payoff process without the boost of paying off a few smaller debts early on. It can get you out of debt faster since you’ll stop accumulating interest on high-interest debts much more quickly.

3. The Debt Snowflake

This is a method that can be combined with one of the above options or used to pay off debt in any order you choose. The idea here is that you find small ways to save a few bucks, and then transfer that money saved toward debt payments.

With the debt snowflake method, you’ll need to be exceptionally aware of your spending patterns. For instance, if you normally spend $10 on a lunch out at work, but pack your lunch one day, you could save $5. That $5 is a snowflake that can then go toward paying off debt.

The key to debt snowflakes is to make sure they don’t “melt.” Get into the habit of transferring “snowflake” money to debt accounts immediately, or at least on a weekly basis. Otherwise, you run the risk of that hard-saved cash being used for other purposes.

4. The Credit Card Transfer

If much of your debt is in the form of high-interest credit card balances, consider using balance transfer offers to pay off that debt more quickly. Since credit cards often have interest exceeding 15%, it’s not unusual for most of your minimum payment to go toward interest, even on a relatively small balance. If you can transfer that balance to a card with a 0% introductory annual percentage rate, you can put more money toward the principal balance each month, paying off your debts more quickly.

Be careful, though, to read all the terms of a credit card balance transfer. Most cards charge a fee for the balance transfer. If you’ll pay off the card’s balance quickly, the transfer may actually cost more than it saves. You can find more info on some of the better balance transfer credit cards here.

5. The Half Payment Method

What if you’re on such a tight budget that you can’t even squeak out some extra dollars to start on a debt snowball or avalanche? One option is to start making half of your minimum payment every two weeks. Bi-weekly payments, which may fall when you get a paycheck, can save you money over time on debts that are compounded daily or monthly based on the average balance.

The reasoning behind biweekly payments is somewhat complex. But, essentially, paying more often allows less interest to accrue between payments, which means more of your payment goes toward the principal. Plus, if you make a half payment every two weeks, you’ll actually have made a whole extra minimum payment by the end of the year!

Half payments can help even out your bank account balance and can help bring down your debt balances more quickly. Combining the bi-weekly payment method with another method for applying any extra cash you scrape together toward one debt at a time could be a powerful option for meeting your financial resolution this year.

Image: FatCamera

The post 5 Ever-So-Simple Strategies for Paying Off Debt in 2017 appeared first on Credit.com.

How to Handle Debt & Maintain Your Mental Health

It’s no secret that most people feel lousy when they’re in financial trouble, and one of the biggest financial stressors seems to be debt.

It’s no secret that most people feel lousy when they’re in financial trouble, and one of the biggest financial stressors seems to be debt. When you’re in debt, simple tasks like going to your mailbox, where you anticipate finding an avalanche of bills or overdue notices, can bring on stress. If you relate to this feeling, you aren’t alone. According to a Time article, there are a plethora of Americans in an excessive amount of debt. In fact, the Federal Reserve reported at the end of 2015 that, on average, an American between the ages of 18 and 64 has $4,717 in credit card debt.

So aside from being a burden on our wallets, what does this debt do to us?

“Financial issues are a common source of stress,” Dr. Jay Winner, director of the Stress Reduction Program for Sansum Clinic in Santa Barbara, California, said. “Additionally, when someone has extensive debt, there is a tendency to work excessive hours. This deviation from a healthy work-life balance leaves people less resilient to other stressors in their lives.”

How Debt Stress Impacts You

Chronic stress is linked to a wide variety of mental health ailments. Dr. Robert Williams, a psychiatrist in Phoenix, explained that long-term stress physically affects the brain through the well-known “fight or flight” mechanism, which occurs during times of perceived danger, such as those experienced when a threat to financial well-being occurs. Williams explained that when the deep limbic system, or primitive brain, is less active, there is generally a positive, more hopeful state of mind. When it is heated up, or overactive from too much stimulation in the form of perceived threats, negativity can take over.

In addition to an overactive limbic system, Williams said some people are born with a thin cerebral cortex. Emotional stability is a manifestation of the cerebral cortex, and studies suggest a relationship between depression and a thinning cerebral cortex. Dr. Williams said the combination of an overactive limbic system and a thinning cerebral cortex could lead to severe depression. Long-term stress from things like too much debt can cause anxiety, restlessness, lack of motivation or focus, feelings of being overwhelmed, irritability or anger, sadness or depression, even thoughts of suicide.

Coping With Debt Stress

If you are stressed because of a financial situation, here are some suggestions from Dr. Winner that may help you cope.

  • Be mindful. Focus on doing one thing at a time with your full attention.
  • Learn a relaxation exercise. Learning to relax for a specified period of time will help you learn to relax through the day and reduce stress.
  • Do not resist the stress. There are not much in the way of health risks from short-term stress; so if you’re too stressed now, don’t stress about being stressed. Just learn some strategies so the stress does not become excessive in the long term.
  • Learn patience. This is important because the emotion most strongly associated with heart disease is anger and hostility.
  • Decrease the frustration of failure. Instead of thinking you are worthless when things go wrong, realize progress comes from learning from our mistakes. Ask, “What can I learn from this?”
  • Keep things in perspective. One way to keep things in perspective is to think of your health, family, friends etc.
  • Take care of yourself. Eat nutritiously and mindfully, enjoying the taste and aroma of your food. Get regular exercise.
  • Have some technology-free time. If you can spend some of that time out in nature, that’s all the better.
  • Talk with someone. If you’re overwhelmed by stress and basic techniques are not helping, discuss this with a physician or mental health professional.

Paying Off Your Debts

Getting out of debt is one sure-fire way to help reduce your stress levels. Of course this is easier said than done, so consider taking small steps toward this larger goal. To start, gather all the information about your debts, including who you owe what amounts to and any interest rates or fees that are applicable to each of the debts. From there, consider what options you have. Can you consolidate your debts? Move the debt to a balance transfer credit card and eliminate interest charges for a while? You may even decide to seek the advice of a professional debt counselor to help you find the right path.

Whatever you do, take a deep breath and keep moving forward. Not only will paying off these debts help your stress, but it will help improve your credit scores. (You can see how paying down your debts are affecting your credit by checking out two of your free credit scores, updated every 14 days, on Credit.com.)

Image: mavoimages

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How We’re Cutting Back Now to Have More Later

cutting-back-expenses

Despite having 13 years of combined experience in financial services when we first started dating, we had a combined total of $51,000 in credit card debt. The old saying, “the cobbler’s kids have no shoes,” could apply, except that was part of the problem. We had lots of really nice shoes.

After we paid off our $51,000 in credit card debt in two and a half years, we created a side hustle to help others pay off debt, save for retirement and live better lives. Now our goal is to turn our side hustle into our hustle.

We’re happy to say we’re halfway there! A few months back, one of us (me, as I’m the one writing this) quit his W-2 job. To maintain financial control, we’ve re-implemented much of what we did when we paid off our debt.

We actually re-implemented most of these practices six months before I left my W-2 job. We did this to ease ourselves back into more restrictive spending. After we paid off our debt about 10 years ago, our spending returned to conscious but comfortable levels. We knew that losing one W-2 income was possible, but it still required an adjustment to our spending behavior and was necessary to grow our business.

If you want to pay off debt, put retirement or college savings on the fast track, or grow your own business, this article is for you.

We Cut Out Comfort Expenses

We never planned to live in perpetuity with the frugal lifestyle that we adopted to pay off our debt. Our goal was to pay off our debt so that we could then improve our quality of life. We were paying $10,000 a year to finance our debt. When we paid that off, we had an extra $10,000 a year in “found money.” Who wouldn’t take that to Vegas?

Well, we didn’t go to Vegas, but we did improve our quality of life with a housekeeper, monthly massages and better wine. We experienced a conscious budget creep.

Our current goal is, again, not to live a perpetually frugal lifestyle but a bigger one. For the time being, however, we’re giving up margaritas at the bar downtown today to have margaritas on the beaches of Mexico tomorrow.

The best way to calculate where to cut back expenses is to itemize all your expenses on an Excel spreadsheet. We’re Excel junkies, and itemized all our expenses for a full six months. This exercise highlighted categories in which we could cut back or cut out. Some categories surprised us. It was not surprising, however, that we could cut back on wine.

Admittedly this exercise is tedious, but it’s effective. For those with less patience or time, we recommend using budgeting apps. These connect to all of your accounts and itemize expenses for you. Some only itemize as far back as each account allows. (For another way to see how your spending is affecting your finances, you can check out your two free credit scores, updated every two weeks, on Credit.com.)

We Resumed Our Pre-Debt-Free Grocery Budget

We’re calling this category out specifically because it’s a large category for most budgets, ours included. When we were paying off our debt, we spent $75 to feed two grown men for an entire week. After we paid off our debt, we increased that to between $100 and $150 by buying higher quality and luxury foods. Organic hummus is not a necessity.

Our weekly grocery budget is now $100. We’re achieving this in a number of ways. Our main grocery store has double-deal Wednesdays. This means that on Wednesdays only, both the previous week’s and the following week’s sales are active. We only shop this store on Wednesdays, and only buy sale items.

When we shop other stores, for personal care or cleaning products, for example, we only buy items that are either on sale or for which we have a coupon. If we’re lucky, we get both discounts.

Figure out the hook your stores use, and don’t take the bait. Use those hooks to your advantage. Only buy sale items or items for which you have coupons.

We’re Back to Free & Cheap

Just as when we were paying off our debt, we know we can’t go from being social butterflies to hermit crabs. With planning, we figure out how to have fun and still reach our financial goals. The operative word here is “planning.” Without financial safeguards in place, we know we’d easily fall off the money train.

Before each weekend, we establish money-conscious plans. Whether it’s a game night at our house, a free concert in our local park, or a no-cost physical activity such as riding our bikes or hiking, we’re scheduled.

We Increased One of Our Retirement Contributions

We adapted this strategy from what we did when we paid of our debt. When we did this, we cut back our 401K contributions to the minimum that allowed us to get the maximum retirement match from our employers. We didn’t want to leave money on the table.

As I work for myself, I have no company retirement match. So we don’t lose retirement savings momentum, we increased my husband’s 401K contribution to make up for my loss on contributions.

As soon as our business makes a profit (we currently only have revenue), I will contribute to a SEP (Simplified Employee Pension) IRA.

All Revenue Goes Back to the Business

This, too, is an adaptation of what we did when we were paying off our debt. Then, we implemented the above strategies and put all the money saved toward our debt. We’ve adapted this for our current goals to put any revenue our business earns back into our business. This is to grow our business so that it will someday support both of us.

Regardless of your financial goals, earmark where all your “extra money” will go. If your extra money doesn’t have a pre-determined destination, there’s a risk it will be spent unwisely.

As a wine enthusiast, it’s hard for me to say that a $60 bottle of wine isn’t a wise purchase. But as a money expert, I know that it’s not. However, we’re willing to give up a little today to have more tomorrow.

This is how we’ll achieve our financial and life dreams.

Image: oneinchpunch

The post How We’re Cutting Back Now to Have More Later appeared first on Credit.com.

How a Rocket Scientist Manages His Money

aeronauticalengineer

Jason Lowery is a typical 29-year-old. He likes hanging out with friends, loves his family and spends weekends tinkering on his hobby car, a 1969 Chevrolet Chevelle. But unlike most of his peers, he’s completely debt-free, right down to his college tuition.

Born in the “lowly little” town of Lilburn, Georgia, as he jokingly put it, Lowery did well for himself. He graduated from Baylor University, in Waco, Texas, in 2010 with a bachelor of science in Mechanical Engineering with a minor in Mathematics. He is currently in grad school at the Air Force Institute of Technology, working toward a Master of Science in Astronautical Engineering with a certificate in Systems Engineering.

While most of Lowery’s undergraduate tab was picked up by the Air Force Reserve, which he joined freshman year, he still left college owing $60,000 in student loans. Adding to that, his late mother had a whopping $20,000 in credit card debt.

For someone whose parents always viewed themselves as being on top of their finances, Lowery was stunned. “My mom lost a lot of pride by having to handle that,” he said.

So he came up with a plan. “I said, ‘Tell you what. If you pay off $20,000 of my loans in your name, I’ll pay off your credit cards, and do it quickly,” Lowery recalled. In a year and a half, he would consolidate all his mother’s credit cards. Then, as his parents assumed his loan for $20,000, Lowery prepared to spend the next three years of his life paying off the remaining $40,000 in student loans — as well as those credit cards.

“I paid off all debts, including my mom’s, between January 2011 and February 2014,” Lowery said. “I paid my last bill 25 days after she died. It felt like kind of a proud tribute to her and all she taught me. Also served as a huge perspective change — life after debt corresponds with life after Mom.”

Here’s how Lowery did it, and what he can teach you about managing money.

A Crash Course in Differential Equations

To tackle his mother’s credit card debt, Lowery listed all her cards, noting their balance and interest rate. It’s a differential equations trick, he said. “I figured out every possible equation and chose the one that would amount to me paying the least amount in interest.” In the end, he went with the snowball method, paying off her debts in order from the smallest balance to largest, regardless of interest rate or monthly payment requirements.

“She had one card with $2,500 and a 29% rate, and I just nuked that card in two-and-a-half months,” Lowery said proudly.

At one point, he noticed an offer for a balance transfer credit card with a 0% interest rate. Though he knew it’d cost 4% to move his mother’s debt to the card, he “did the math,” realized “this is how much I’ll lose” and decided it’d be cheaper to take the 4% hit than risk paying more interest on the other cards. “My mom had severe interest rates,” he said. “They were really trying to crush her.”

Though Lowery’s typically wary of those offers, he worked diligently to pay the card off in 12 months before its higher interest rate kicked in. He was also realistic: “I knew I could pay it off before then,” he said.

Graphic 1 - Tracking How I Spent Every Dollar of Income

Cutting Variable Costs 

Since he works in the military, Lowery is fortunate to have a predictable income and some of his living costs covered, like healthcare. Certain tax exemptions also help. Still, Lowery fast-tracked paying back his debt by accounting for every dollar he spent.

“Less than 10% went toward eating,” he said, and since he was “used to poor living conditions because I was a college kid,” he skipped the fancy apartment with a dishwasher and electric stove. “It’s not like I was living horribly,” he assures, but he certainly adopted a penny-pinching mentality. He paid $550 each month for an apartment with internet and bought a used car to avoid monthly payments.

His mother, it seems, did just the opposite. “She was just constantly sending me stuff, even though she was recovering from this debt,” Lowery said. “I guess she was just used to a certain way of life, and when the recession hit and her investments tanked, she didn’t adjust her habits.”

He added, “I knew if I didn’t get my act together, that would happen to me.”

Once he finished paying the credit cards, Lowery continued putting the same amount toward his student loans. “I had already developed the habit of paying a lot each month,” he said. “And I was comfortable with living above a grandma’s house.”

The Color-Coded Budget

Lowery views money as colors. Whatever he spends is colored one of four ways: Green indicates assets that will gain value over time, such as retirement funds; red is for debt; blue is for costs of living, such as mortgage payments, home insurance and utilities; gold is for fun. The system, he said, forces him to be honest: “If you want to go out and have a nice meal, is that cost of living — i.e., food that’s necessary to eat — or is it recreation?”

Using Empirical Data 

As soon as Lowery gets paid, he records that information in his budget on Excel. (The charts shown here were all done with the software.) Next, he breaks down how much he’ll pay this month for things like insurance, rent and fun and then plugs in those numbers, repeating the process the following month.

As you may guess, he’s amassed a wealth of data on his spending behavior. “I don’t do automatic payments,” he said. “There’s a bias — you get too reliant on using computers — you don’t really know what’s going toward bills. If something were to creep, you wouldn’t have any way of understanding how it creeps.”

Put another way, if your electricity bill rises, “do you have empirical data on that?” If not, Lowery said you’re depriving yourself of information you could use to make smarter decisions. (Another great way to keep track of how your finances affect you is keeping an eye on your credit score. You can do this by viewing two of your credit scores, updated every 30 days, on Credit.com for free.)

Graphic 2 - My Budget Each Year When I Paid Off College Debt

Keeping a Script

“When I get my bills or buy anything, nothing I’m doing is against a script that I’ve already set for myself,” Lowery said of his budgeting mindset. “I even have money set away for wasting.” He continued, “it’s easier to plan stuff out and make the decisions when it’s not urgent. You’ll make the smart decisions when there’s no emotion involved.”

Whenever he finds himself going off track, he refers to his spreadsheet to see where to make adjustments. He also uses the spreadsheet to estimate costs for his goals, such as starting a family, taking a trip or souping up his Chevelle. Lowery’s budget guides his lifestyle, not the other way around.

“Everyone thinks engineers are nerds who work on one stupid thing, but military engineers are forced to think about things holistically,” he said. “When we think about how much something will cost to build, we’re brainwashed into not just thinking of unit costs but about life-cycle costs and how much it will cost to train someone to use it.”

When spending, ask yourself if your choices align with your big-picture goals.

A Heuristic to Live By 

In Lowery’s chart above, there is a quote that reads, “They say a hammer tends to view everything as a nail.” Expanding on this, Lowery said, “engineers naturally develop rules to explain things,” and this quote “reminds you that you are biased.”

That could be due to your education, your beliefs or what you’ve been told all your life. “If you’ve been told you’re a hammer, you’re going to view everything as a nail,” he said. “That’s how it relates to your personal debt — you have to recognize that you’ve probably been viewing things incorrectly.”

It’s a good guideline to live by — and like his budget, a helpful reminder.

More Money-Saving Reads:

Main Image and Inset Images courtesy of Jason Lowery

The post How a Rocket Scientist Manages His Money appeared first on Credit.com.

4 Things Soon-to-be Grads Should Know About Student Loans

studentloanforgiveness

It’s easy to have a stress-free attitude about student loan debt in college, especially if your pay period hasn’t begun. However, to some, student loans can be like speaking a different language, so it’s important to understand how they work before you fall into bad debt. Here are the top things to know before your student loans kick in.

1. There Are Different Repayment Options

Once students graduate, they are automatically enrolled in the standard repayment plan. However, there are other plans out there that may be more beneficial. Consider doing a little research on payment plans before your loans begin. Graduates are responsible for contacting their lender to find out when the first payment is due. You can then ask if you qualify for an extended or graduate payment plan.

If graduates expect to see a steady increase in their income over time, the Graduated Plan will likely be the right choice for them. With this plan, monthly payments start low so they’re affordable and then increase after two years, usually over the course of a 10-year plan. You can also choose an income-based plan, where monthly payments are based on how much you earn. These payments are usually lower than those of a standard payment plan.

2. Interest Can Kick in as Soon You Get the Loan 

An interest loan is tacked onto your loan automatically; sometimes this can be fixed, and sometimes it is variable. If you have a variable-interest loan, then this means your interest is subject to change over time. If you have a fixed-interest rate, then it will always stay the same. If you are a student working in college, then you may want to consider paying interest in school. This will help you pay off your loans quicker (and more easily) once you graduate. Keep in mind, interest accrues the second you take out the loan. If you choose to pay your loan early, however, your monthly interest payment while in school could be as little as $100 each month.

3. Deferment and Forbearance Are Two Separate Things

Under certain circumstances, graduates can receive a deferment or forbearance that allows them to pause or reduce their federal student loan payments. Postponing or reducing payments may help them avoid default. Forbearance allows you to make no payments, or reduced payments, for up to a year, but interest will accrue on your subsidized and unsubsidized loans (including all PLUS loans) during this period. A deferment is a period in which repayment of the principal and interest of your loan is temporarily delayed. Different situations can make you eligible, such as unemployment. Most deferments are not automatic; you’ll need to submit a request to your loan servicer.

4. The Sooner You Pay Off Your Debt, the Better

It’s important to research strategies to pay off your student loans as well as repayment options. Try to complete your exit counseling at your school to learn about your legal rights and responsibilities as a borrower. Then learn how much you owe and to whom. For example, ask yourself: Do you have federal loans and private student loans? How much do you owe on each? Find out when you can start making payments. Most forms of federal student aid will require you to start making payments after six months; private lenders may set other deadlines.

Soon it will be time to start repaying your loans. Understand that smaller monthly payments mean you’ll pay more over time, so if possible, make additional principal payments. This will allow you to pay your loan off faster and pay less interest over time. Budget carefully and identify expenses you can cut so you can put the money toward student loan payments. Lastly, try to avoid taking on more debt until you pay down your student loans. (You can track how your student loan debt is affecting your credit by viewing your two free credit scores, updated monthly, on Credit.com.)

More on Student Loans:

Image: Nick White

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When Should You Get A Secured Credit Card?

When Should You Get A Secured Credit Card

Paying off debt impacts you in many ways – both positive and negative emotions arise during your debt payoff journey. I remember when I was paying off debt I felt both shame and pride, frustration and gratitude, and a host of other emotions, including a lack of freedom. Those all tied back to seeing who was responsible for the situation. It was my actions that led to the debt and it would be my actions that got me out of it.

The credit cards didn’t forcibly remove themselves from my wallet to spend money. I willingly took out the student loans. However, I worked hard and clawed my way out of debt. After becoming debt free, I found myself at a crossroads. I knew I needed to rebuild my credit, as it was in shambles though I had few options. In the end, I turned to a secured credit card to help rebuild my credit.

When You Have Few Options

Getting a new credit card is not always the easiest after paying off a significant amount of consumer debt. This is especially the case if you worked with a debt- counseling agency. Depending on how the credit bureaus report your payoff, your score can take a significant hit. That’s also not to mention the fact that your score might already be too low in the first place. As a result, you will be left with few options.

This is when a secured credit card comes into the picture. Most credit cards are unsecured, which means the issuing bank takes a risk you will be able to repay your charges. With a secured credit card you “secure” the card with a cash deposit at the bank. This protects the bank and provides you access to a card.

You Want to Rebuild Your Credit

A key point behind a secured credit card is to provide the ability to rebuild your credit. If you have a below average credit score, you will face a challenge getting a typical credit card. The best secured credit cards alleviate that problem by providing the opportunity to show you’ve changed your ways.

This is when to utilize the new practices you picked up during debt repayment. You want to use the card each month for already budgeted for purchases. You then want to pay off the card each and every month. Over the course of time, this will begin to improve your credit. This, however, should be viewed as a short-term solution – for a variety of reasons.

Things to Keep in Mind with A Secured Credit Card

A secured credit card serves one main purpose – rebuilding your credit when you have no other options. You may feel conflicted getting a credit card after paying off debt, though if you plan on needing access to credit in the future you want to take that into consideration.

Beyond your personal situation, there are a variety of things to keep in mind when getting a secured credit card. Some of those things are:

  • Making sure the issuer reports to all three bureaus (Equifax, Experian and TransUnion) monthly. Some issuers report to only one bureau or irregularly. This will not help your efforts.
  • You provide the funds to back or “secure” the card. The issuing bank will hold those funds on deposit.
  • You can be turned down for a secured credit card. Each bank has different requirements. Make sure to do your homework before applying to ensure you have what they want.
  • You need to make timely payments. If you’re unable to, wait until you can and then get a card. It’s also important to remember not to max the card out, but keep your utilization rate low to optimize your efforts.
  • Watch the fees. Some secured credit cards are notorious for their fees. You likely won’t be able to get around all of the fees out there, but you don’t want to pay too many.

Other Types of Secured Financing Options

Credit cards aren’t the only type of financial instruments that extends credit with a collateral. Since secured loans are always protected by a collateral of some sort, you may find that the interest rate on these types of loan tend to be lower.

For example, mortgage rates have historically always been on the lower end. That’s because the banks own your home in case you default. However, secured loans aren’t always just for new financing options. You can take out a secured loan from Avant for an auto loan, HELOC, or even a boat loan.

Final Thoughts

I know it seems like a secured credit card is something to avoid. That’s not the case; there are good ones available. You want to make an informed decision to put yourself in the best possible position.

A credit card may be the last thing on your mind after paying off debt. That’s understandable. If you need to rebuild your credit, a secured credit card can be a good tool to get you back on track.

The post When Should You Get A Secured Credit Card? appeared first on ReadyForZero Blog.

How a $1,000 Credit Card Bill Can Take 4 Years to Pay Off

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Many people get into credit card debt over the holidays. But regardless of the reason, one of the best things you can do is pay it off. Ideally you want to put as much as you can toward the balance to clear the debt faster. You also want to avoid paying interest.

Making minimum payments on your balance can be tempting, but tends to take years to clear out a debt. To prove this, we used Credit.com’s credit card payoff calculator. Let’s say you have $1,000 on a card with a 15% APR. A minimum payment might be $25 a month, which you’d be paying well into the next decade. Specifically, it would take four years and eight months — that’s 56 payments — to pay off a balance of $1,000. Besides dragging out the debt for years, you’d end up paying $395 in interest by the time you made your last payment on August 2020.

Another thing to consider is how taking years to pay a small balance might affect your credit. If you keep spending while making small payments, you’re likely to reach your credit limit, and how much of your available credit you use — i.e., credit utilization — is one of the biggest factors in credit scoring. (To see how such debt might affect your credit, you can get two free credit scores every 30 days on Credit.com.)

You’d be surprised how much increasing those monthly payments will end your debt quicker. Say you paid $35 on your credit card balance instead of $25. You’d be done in three years — by December 2018 — and only have to pay $245 in interest. That’s still a long time to be paying off debt, but now you see how a budget adjustment can ramp up the process.

If you have credit card debt, don’t panic — just make a plan to get out of it. Avoid adding to it and figure out how much you can pay each month to get your balance to $0. (The credit card payoff calculator can help.) If you’re in a tough spot, do your best to keep making payments even if they’re small. Your credit score will appreciate it.

More on Managing Debt:

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The post How a $1,000 Credit Card Bill Can Take 4 Years to Pay Off appeared first on Credit.com.

The Hidden Bonus of Paying Off Credit Card Debt

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In theory, nobody wants to be in debt. But when credit card bills arrive, we don’t exactly rush to pay them. And when we do, we may not pay the full balance.

Understandably, we don’t want to be separated from our money. We earned that money, it’s hard to see it come into your bank account and exit just as quickly. But racking up high balances on your credit cards, even if you continue to make on-time payments, and not paying the balances in full can get you into some credit trouble. Not only will you be in debt, but your credit scores will suffer — why?

After payment history, the portion of your credit limit that you use has the biggest influence on your credit score. Credit utilization, as it is called, is calculated both for individual cards and all your cards — and the lower it is, the better. (You can see where your credit utilization stands for free by getting your credit report summary every month on Credit.com.) Credit experts suggest not going over 30% of your limit, and if you are trying to achieve the very best scores, under 10%. If your credit limits are relatively low, that can seem impossible (and unfair if you are paying your bill every month), but most credit scoring models consider high credit utilization to be a red flag that you could easily get overextended and miss a future payment.

Getting Out of Debt & Raising Your Credit Scores

If you’ve gotten yourself into credit card debt this way — you’re making your payments, you’re not late and yeah, you have debt, but you’ll pay it off eventually — you may see your scores go down. Carrying a balance on your credit cards from month to month not only costs you money in interest charges, the increased utilization can hurt your credit. But here’s the upside — you can fix it. There are a few of ways to do so.

1. Raise Your Limits

The first is to ask your issuer to increase your credit limit (but be aware that you’ll need to have a reason, such as perhaps more income). If you have a secured credit card, you can increase your limit by increasing your security deposit. Keep in mind that your credit is already being hurt by a high utilization rate, so creditors may see you as more at-risk of defaulting than when they first approved you for that credit card and may not want to increase your limit.

2. Pay Down Your Debt

The second option is the most obvious one — start paying off your credit card debt! You can use a credit card payoff calculator like this one to make a plan and start tackling your debt. Paying off credit card debt can be a long process depending on how much debt you have and how much flexibility exists in your current budget. The lower you can get your credit utilization, the better your credit scores will be. Just keep in mind that skipping other bills to pay credit card debt is rarely advisable. A missed payment is a bigger black mark on your credit report than a high utilization.

3. Get a Balance Transfer Credit Card

Sounds a bit counterintuitive, right? Why would you apply for a new credit card when you’re having trouble paying off your credit card debt? Balance transfer credit cards are designed to help you manage your debt and it can make a big impact on your utilization problem right off the bat. First off, the balance transfer gives you some breathing room by allowing you to transfer some of your debt to a credit card with 0% interest for a set period of time. You may have to pay a balance transfer fee (often 3% of the transferred balance), so pay attention to the terms of the card before you apply. Then you have some time to avoid accruing interest charges on that balance while you pay off the debt.

The added bonus for your credit score is that your overall credit utilization will be helped by the extra credit card and increased credit limit. Let’s say, for example, you have three credit cards with limits of $3,000 each. You have balances on those cards of $2,000 each. That totals to $6,000 of debt with an overall credit limit of $9,000, a credit utilization of 67%. If you open a new balance transfer card with a limit of $6,000, you can improve your utilization to 40% ($6,000 total debt / $15,000 total limit = 40% utilization). And as you use the balance transfer card to pay off your debt with (albeit temporary) low-to-no interest, you can get under that 30% mark much faster.

The good news about credit utilization is that once you are able to get that number down, you are not penalized for a having had high credit utilization in the past. Using cards lightly and keeping balances low just before you are going to apply for credit can help you make sure your credit score is as high as it can be before a lender or card issuer checks it.

More on Managing Debt:

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The post The Hidden Bonus of Paying Off Credit Card Debt appeared first on Credit.com.

Can We Pay Off Debt to Qualify for More Financial Aid?

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Q. My daughter goes to college in one year. We’ve saved a lot in 529 plans and retirement accounts, and we only have about $45,000 in a brokerage account that would count against us for financial aid purposes. I also have $20,000 in credit card debt. Should I sell the stocks and pay off debt so we appear to have less cash for financial aid purposes? The brokerage money has no real goal.

A. Paying off debt can be a great thing, but let’s first talk about financial aid and how your assets will be considered.

The first step in the financial aid process is completing a form called the Free Application for Federal Student Aid, better known as FAFSA, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette, NJ. Roughly 300 schools also require another form known as the CSS Profile, which is short for the College Scholarship Service Profile.

We’ll focus on the more common FAFSA form and how it treats various assets for financial aid purposes.

“On a macro level, the FAFSA formula treats income/assets as follows: 20% of student’s assets (excluding 529s), 50% of student’s income after some allowances, 2.6% to 5.6% of parental assets based on sliding income and allowances, and 22% to 47% of a parent’s income based on sliding income and allowances,” Maye said.

These percentages are all important for the starting point for need-based financial aid — the calculation of the Expected Family Contribution (EFC) — which considers income as well as assets of both the parent and student, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge, N.J.

“Neither mortgage debt nor consumer debt such as auto loans and credit card balances can be used to offset the value of investment assets in calculating the net worth, which is entered into the formula,” Mott said.

Now with your situation, Maye said, the 529 plans as a parental asset may reduce financial aid by a maximum of 5.64%, depending on your circumstances.


“In terms of the retirement accounts, it is good news as the calculation excludes retirement assets such as 401(k)s, IRAs and Roth IRAs,” Maye said. “However, if you tap a retirement asset to pay college bills — including a Roth IRA — that is considered income on the following year’s FAFSA.”

Maye said your brokerage account receives the same treatment as a 529.

Using your assets to pay debt can reap multiple rewards, Mott said.

“It may reduce the EFC, your cash flow should improve without the monthly payments and you will save the interest expense as well,” she said.

Assuming you have an adequate emergency fund, it likely makes sense for you to use the taxable brokerage account to pay off credit cards, Maye said.

“The primary reason it makes sense to the pay off the credit card debt is it eliminates a non-tax-deductible, high interest rate liability,” Maye said. “The fact that it might be helpful from a financial aid perspective is a secondary benefit.”

But, before you use your brokerage account to reduce the outstanding balance on your credit cards, be sure you understand the tax consequences of the decision, Mott said.

“The addition of possible capital gains to your adjusted gross income that aren’t fully offset by taxes might actually increase your calculated EFC,” she said. “You also don’t want to end up with a tax bill you hadn’t anticipated come next April.”

She recommends you speak with a tax professional to determine what, if any, capital gains might result from the sale and how that would affect your 2015 income tax profile.

More on Student Loans:

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The post Can We Pay Off Debt to Qualify for More Financial Aid? appeared first on Credit.com.